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NIO Inc. (NIO) Q3 2021 Earnings Call Transcript

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NIO earnings call for the period ending September 30, 2021.

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NIO Inc. (NIO 4.44%)
Q3 2021 Earnings Call
Nov 09, 2021, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated third quarter 2021 earnings conference call. [Operator instructions] I will now turn the call over to your host, Ms. Eve Tang from Capital Markets and Investor Relations.

Please go ahead, Eve.

Eve Tang -- Investor Relations

Good morning and good evening, everyone. Welcome to NIO's third quarter 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have Mr.

William Li, founder, chairman of the board, and chief executive officer; Mr. Steven Feng, chief financial officer; and Mr. Stanley Qu, senior vice president of finance. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S.

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Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in recent filings of the company with the U.S.

Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Hello, everyone. Thank you for joining NIO's third quarter 2021 earnings call. [Foreign language] In the third quarter of 2021, we delivered 24,439 ES8, ES6, and EC6, a new quarterly record representing a solid growth of 100.2% year over year. [Foreign language] Based on overall production planning from September 28 to October 15 to prepare for further capacity expansion and new product introduction, including ET7, we implemented upgrade and the restructuring of manufacturing lines at the Hefei JAC-NIO advanced manufacturing center.

Affected by the upgrades and the restructuring, we delivered 3,667 vehicles in October. The plant has resumed to normal production since late October. [Foreign language] According to the data published by China Passenger Car Association, the penetration rate of battery electric vehicles among passenger vehicles reached 17.5% in September. As the automotive industry is accelerating its transformation toward smartization and electrification, more and more users are now choosing smart EVs over ICEs.

The order momentum continues to be strong, and our new orders have reached a new all-time high in October. Currently, our delivery volume is mainly constrained by supply chain volatilities. We expected the total delivery in the fourth quarter of 2021 to be between 23,500 to 25,500 vehicles. [Foreign language] In the third quarter, the vehicle gross margin stood at 18%, while the overall gross margin reached 20.3%, benefited from the sales of regulatory credits.

[Foreign language] Next, I would like to share with you some recent operational highlights of the company. [Foreign language] In September, the first of batch of ET7 tooling trial build wrote off the production line representing that the tryouts and the commissioning of the overall manufacturing process have been completed. The teams are making final preparations for the mass production of ET7. During this appropriation process, we have also made various product optimizations on ET7.

For example, the drag coefficient of ET7 was improved from 0.23 to 0.208. We are very confident about the final product competitiveness and the market performance of the ET7. [Foreign language] The software and hardware development of NAD are also pressing ahead on schedule. The development of the other two new products on NIO technology platform 2.0 are also moving forward smoothly and the delivery to users is expected to start in the second half of next year.

We will share more product details at NIO Day 2021. [Foreign language] In September, we launched the 75-kWh standard range battery pack, with LFP/NCM hybrid cells, which has further enhanced the competitiveness of NIO's battery systems and powered by the industry-first LFP/NCM cell layout and advanced software and hardware systems of a thermal management and SoC estimation. NIO's battery system team worked closely with our partner in overcoming the disadvantages of the LFP cells in aspect of low temperature performance and SoC estimation. On top of that, the 75-kWh hybrid battery pack has also achieved higher energy density and lower -- longer drive range and lower cost compared with the 70-kWh NCM battery pack.

[Foreign language] In terms of production capacity, besides the upgrades and the restructuring of the manufacturing lines in JAC-NIO Advanced Manufacturing Center, the second manufacturing site at NeoPark in Hefei is also under construction. After the kickoff on April 29, we completed the main structure construction on August 26, and will start the equipment installation at end of this month. In the third quarter of 2022, we will begin production officially. [Foreign language] On the supply side, due to global COVID-19 pandemic, extreme weather events, and other factors, the overall supply chain remained challenging.

Our supply chain team, R&D team, and the partners have adopted a series of measures to support the record-high quarterly delivery in the third quarter and will continue to secure the supply for the delivery in the fourth quarter and upcoming new product production. [Foreign language] With regards to the sales and service network, we now have 32 NIO Houses and 285 NIO Spaces in 132 cities in China. We'll continue to expand and optimize other NIO House and the NIO Space coverage to effectively penetrate into more Tier 2 and the Tier 3 cities. As of now, we have 43 new service centers and 181 authorized service centers in 141 cities.

We will build more service centers to ensure high-quality services to the rapidly growing user base. [Foreign language] Up until now, we have deployed 608 battery swap stations in 153 cities in China and completed over 4.74 million swaps. In addition, we have built over 460 power charger stations and 3,155 destination chargers across China. [Foreign language] As we speed up the deployment of the battery -- of the swapping and the charging infrastructure, the superior experience and the value brought forward by battery-swapping technology and Battery as a Service has made us the go-to choice for more and more users.

[Foreign language] Regarding the global market, we opened our NIO House in Norway on September 30, which has attracted wide attention from both the public and media. On the same day, we started to deliver ES8 and provided services to our users in Norway. Besides achieving Euro NCAP 5-star safety rating, the ES8 has also received rave reviews on its performance and the product experience from the local users and the media. The order intake has exceeded our expectations.

More importantly, among all the orders, 92% of the users have chosen us. NIO's products, services, and innovative business model, not only have been well-received in China but also present unique value and strength in the global market. In 2022, we will further step up our efforts in entering more global market. [Foreign language] Users have always been the foundation of NIO.

A diversified user community brings a greater vitality to NIO and drives NIO to become better. In October, NIO and the NIO User Trust joined hands with Sanjiangyuan Ecological Protection Foundation to build a growing ecosystem in the Sanjiangyuan National Park. With much anticipation, we have announced that NIO Day 2021 will be held in Suzhou on December 18 this year. NIO user advisors and NIO Day organizing committee are working closely on the final preparation.

Please stay tuned for the coming NIO Day, organized together by NIO and our users. [Foreign language] In 2021, NIO has doubled down on investments in product development, capacity expansion, charging, and swapping network, as well as sales and service network. In 2022, we will continue to make a decisive investment to further enhance our long-term competitiveness and provide better products and services to users. [Foreign language] As always, thank you for your support.

With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

Steven Feng -- Chief Financial Officer

Thank you, William. I will now go over our key financial results. For the third quarter of 2021, and to be mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the third quarter were RMB 9.81 billion or $1.52 billion, representing an increase of 116.6% year over year and an increase of 16.1% quarter over quarter.

Our total revenues are made of two parts; vehicle sales and other sales. Vehicle sales in the third quarter was RMB 8.64 billion or $1.34 billion, accounting for 88% of total revenues in this quarter. It represented an increase of 102.4% year over year, an increase of 9.2% quarter over quarter. The increase in vehicle sales year over year and quarter over quarter was mainly attributed to the increase of vehicle delivered volume.

Other sales this third quarter were RMB 1.1 billion or $181.4 million, representing an increase of 350.8% year over year, an increase of 117.9% quarter over quarter. The increase in other sales year over year and quarter over quarter was mainly due to the sales of automotive regulatory credits and the batteries upgrade service, as well as other revenues, which increased in line with incremental vehicle sales in the third quarter of 2021. Cost of sales in the third quarter was RMB 10.81 billion or $1.21 billion, representing an increase of 98.3% year over year and an increase of 13.6% quarter-over-quarter. The increase in cost of sales was in line with revenue growth, which was mainly driven by the increase of vehicle delivery volume in the third quarter of 2021.

Gross profit in the third quarter was RMB 1.99 billion or $0.931 -- $0.31 billion, representing an increase of 240.3% year over year and increase of 26.6% quarter over quarter. Gross margin in the third quarter was 20.3% compared with 12.9% in the same quarter of 2020 and 18.6% in the second quarter of 2021. The increase in gross margin year over year was mainly driven by the increase of vehicle margin and sales of automotive regulatory credits. The increase of gross margin quarter over quarter was many due to the sales of automotive regulatory credits.

More specifically, vehicle margin in the third quarter was 18% compared with 14.5% in the same quarter of 2020 and 20.3% in the second quarter of 2021. The increase of vehicle margin year over year was meaning driven by the higher average selling price, as well as have lower material cost. The decrease of vehicle margin quarter over quarter was mainly due to the increased financing at subsidized rates for vehicle purchases, which resulted in a deduction of vehicle revenue and increase in tooling depreciation cost. R&D expenses in third quarter were RMB 1.19 billion or $185.2 million, representing an increase of 101.9% year over year and increase of 35% quarter over quarter.

The increase of R&D expenses year over year and quarter over quarter was mainly attributed to increased personnel costs in research and development functions, as well as incremental design and development costs for new products and technologies. SG&A expenses in the third quarter were RMB 1.82 billion or $0.28 billion, representing an increase of 94.1% year over year and increase of 21.8% quarter over quarter. The increase in SG&A expenses year over year and quarter over quarter was primarily due to the increase of personnel costs in sales and service functions and costs related to sales and service network expansion. Loss from operation in third quarter was RMB 0.99 billion or $153.9 million, representing an increase of 4.9% year over year and increase of 29.9% quarter over quarter.

Share-based compensation expenses in the third quarter were RMB 255.6 million or $41.2 million, representing an increase of 439.8% year over year and increase of 5.6% quarter over quarter. The increase in share-based compensation expenses year over year was primarily attributed to additional options and restricted shares granted. Net loss in the third quarter was RMB 835.3 million or $129.6 million, representing a decrease of 20.2% year over year and increase of 42.3% quarter over quarter. Net loss attributable to NIO's ordinary shareholders in the third quarter was RMB 2.86 billion or $443.7 million, representing an increase of 140.7% year over year and increase of 333.6% quarter over quarter.

In the third quarter of 2021, NIO repurchased 1.418% equity interest in NIO China from a minority strategic investor for a total consideration of RMB 2.5 billion and recorded amount of RMB 2.02 billion in accretion on redeemable non controlling interests to redemption value. Basic and diluted net loss per ADS in third quarter were both RMB 1.82 or $0.28 per ADS. Excluding share-based compensation expenses and accretion on redeemable non controlling interest to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 0.36 or $0.06 per ADS. Our balance of cash and cash equivalents, restricted cash, and short-term investment was RMB 47 billion, or $10.3 billion as of September 30, 2021.

And now for our business outlook. As William mentioned, for the fourth quarter of 2021, the company expects deliveries to be between 23,500 and 25,500 vehicles, representing an increase of approximately 35.4% to 46.9% from the same quarter of 2020 and a decrease of approximately 3.8% to increase of approximately 4.3% from the third quarter of 2021. The company also expects the total revenues on the fourth quarter of 2021 to be between RMB 9.38 billion and RMB 10.11 billion, representing an increase of approximately 41.2% to 52.2% from the same quarter of 2020 and a decrease of approximately 4.4% to increase of approximately 3.1% from the third quarter of 2021. This business outlook reflects the company's current and the preliminary view on the business situation and the market condition, which is subject to change.

Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Tim Hsiao of Morgan Stanley. Please ask a question.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, Will, and Steven, and team. Thanks for taking my question. It's great to see NIO manage to navigate through the component crunch and production hiccup in the first half. Just two quick questions from my side.

The first one, we've seen restructuring and upgrade of the production lines costs around two rounds of disruption to your delivery and production this year. Just wanted to confirm that if we completed all the necessary restructuring for the three new models next year. Or should we expect any similar disruption some time next year? My second question is about the details of the other sales. Could you share more information about NIO's third quarter other sales? Because it has been surging quite a lot.

I think a more significant revenue increase was attributable to the sales of EV credits and the battery upgrade services. Can we have the further breakdowns regarding the contribution from both items? And what could be the scale, as well as the contribution into fourth quarter? Because if you look at the current fourth quarter revenue guidance, it seems that it just mainly reflected the contribution from the vehicle sales. So, should we expect a contribution from other sales to rise further? Those are my two questions. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Tim, thank you for your question. I will answer the first one, and Stanley is going to answer the second one. In the previous remarks, we have also talked about the progress of our capacity expansion for the two plants. For the first plant, just like you mentioned, starting from the end of September to the middle of October, we have some restructuring and upgrades of the manufacturing lines to further expand the production capacity and prepare for the new product introduction.

Following this upgrade, we probably will do some minor restructurings and modifications of the production lines. But we believe the following restructuring is not going to have a very significant impact on the normal production of the vehicles. Secondly, regarding the new products, some of the new products will be manufactured in the second plant. Then this means that for the second plant, we will need some time to ramp-up the production for the new products, but this is not going to affect the manufacturing of the existing products.

Stanley Qu -- Senior Vice President of Finance

Hi Tim. Regarding the second question, among the other revenue, RMB 517 million was contributed by the EV credit sales. And after deduction of this EV credit sales, our total gross margin for other revenue decreased from minus 5.6% to 12.6%, that's because the -- driven by the expansion of our sales and service network in Q3. And as mentioned by William in his explanation, the construction of our sales and service network infrastructure moved earlier and faster than our sales increase, especially in this year.

So, we are expecting the total revenue of other service will increase, but the gross profit margin for this part will decrease a little bit in Q4. Yeah. OK.

Tim Hsiao -- Morgan Stanley -- Analyst

OK, great. Could you -- sorry, just a quick follow-up some -- could you highlight some potential contribution from the sales of credit into fourth quarter?

Stanley Qu -- Senior Vice President of Finance

Yeah. Almost -- majority of the EV credit sales was realized in Q3. So, in Q4, we don't expect significant revenue from this part. Yeah.

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. Great. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Yes, just like as Stanley explained, this year is a little bit different from last year. We recognized the sales of the regulatory credits much earlier compared with last year.

Tim Hsiao -- Morgan Stanley -- Analyst

Thank you, Will.

Operator

Your next question comes from Nick Lai of J.P. Morgan. Please ask a question.

Nick Lai -- J.P. Morgan -- Analyst

Thank you for taking my question. It's Nick from J.P. Morgan. Good morning, William and Steven.

My two simple question is, number one, related to margin, and the second question is related to ET7, the new exciting model. First of all, on the margin front, yeah, the vehicle margin third quarter was 18%, slightly down from 20% in 2Q. Yeah, I wonder how should we think about the margin into 4Q or first half next year, taking into account of two factors? The first factor is the pricing dynamic or competition from the peers. And the second is improved raw material prices, especially on the battery front.

That's the first question. And I mean, I think you answered part of my question, yeah, earlier on credit sales. So, second question on ET7. It's certainly a very exciting product.

When should we expect the car to hit a showroom in the near term? And medium to longer term, after the production is ramped up, how should we think about the volume and the possibility of ET7 relative to our current high-end product, ES8? ES8's current monthly run rate sales volume is monthly about 1,500. So, how should we think about the profit margin and the volume for ET7? Just two simple questions. Thank you.

Stanley Qu -- Senior Vice President of Finance

Hi, Nick. This is Stanley. About your first question regarding the gross profit margin. And our 75-kWh battery start to -- will start to be delivered from November.

And the gross profit margin will be improved a little bit compared with 70-kWh battery. But prices of our key materials like aluminum, copper, and also chips increase -- are increasing, and there will be pressures for our cost controlling. But we are confident to continuously improve our gross profit margin, which combines efforts, either from the product design or supply chain optimization. So, for Q4, we are expecting the gross profit margin will keep stable.

And for next year, our target is to achieve 20% gross profit margin for vehicles, and along with our launch of NT2.0 products. From a long-run perspective, we try to achieve higher profit margin with about 25%, yeah, of vehicles. OK.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Yeah. As Stanley mentioned, basically, for the NT2.0 product, we expect that with the economy of scales and the volume ramp-up, as well as the optimizations in every aspect. We should be able to average 25% vehicle gross margin in the long run. At the beginning, of course, we will need some time to ramp up the production of the new products based on the NIO Technology Platform 2.0.

According to our preliminary estimation internally, we believe the vehicle gross margin of the new product should be quite good. And for the ET7 delivery, we are going to start the delivery of ET7 in the first quarter of next year. So, it means that we will have the cars in our NIO Houses and NIO spaces around the spring festival's time. Then afterwards, we will start deliveries to the users.

Because we have used many advanced chips and sensors on the ET7, so this has put a lot of pressure on the mass production of ET7. But we believe everything is on schedule. [Foreign language] Thank you, Nick.

Operator

Your next question comes from Mr. Ming-Hsun Lee of Bank of America Securities. Please ask a question.

Ming Lee -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning. William, Steven, and Stanley. So, my question is regarding your supply chain.

So, right now, actually, we are hearing some of the auto company expect the chip shortage situation will not be fully resolved by the mid of next year. So, right now, I want to hear your latest view regarding your chip supply situation and also the large-sized battery pack supply situation. And also, right now, for your consumers, if they place orders to you, I think the waiting time is more than two months already. So, how will you retain long term those consumers? And also, next year, we expect the EV purchase subsidy to be cut further.

So, in this case, if the consumer priced older before year-end, but they need to -- we need to deliver a car after, I think, next year, so will we continue to give then a similar subsidy amount so we absorb the subsidy cut? That is my question. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Thank you, Ming, for the question. Regarding the chip shortage situation, we believe right now is much better than the situation in Q3. But the challenge is still quite big because it's very difficult to forecast what is going to happen for the chip supply. I think everyone knows about the STMicro's situation in Malaysia, and the situation basically is improving right now.

The good thing is our teams have learned to adapt to the situation and face the challenges head on, and we have always been able to find a solution to all those challenges. On the other hand, our volume compared to the material OEMs is still relatively small. So, the challenge is -- for us is smaller compared to the mature OEMs. [Foreign language] I would like to specifically mention that because the many domain controllers in our vehicles are actually developed by ourselves in-house.

So, if there is a shortage of certain chips in the domain controllers, our teams have the capability to quickly find the alternative and do the rapid validation and faster production of the vehicles and the chips. So, because of this capabilities, we have already resolved some chip shortage situations happened to our vehicles. For the 75-kWh battery pack, we announced this in September, but we will gradually start the delivery of the 75-kWh battery pack in late November. We also need some time to ramp up the production of the NIO battery pack, and we believe the production is going to reach a reasonable level at the first quarter of next year.

The battery is actually a very big constraint for us. CATL is our partner on the battery side. They have invested a lot to help us and to support our vehicle production, but we believe the battery is still the main constraint on the overall production and supply capacity. [Foreign language] Yes, as I mentioned, if you placed the order right now, you won't need to wait for some time to get the cars delivered.

But recently, we have also announced some policies regarding the subsidy reduction for the next year to keep our customers and also keep our customers during this long waiting time. For example, we will provide the NIO credit or NIO points to the users during this waiting time, and these kind of incentives have helped us in the past. So, for example, starting from 2018, we have already got those policies in place, and we believe that this is not going to affect the users regarding the waiting time. [Foreign language] Regarding the EV subsidy, we believe this is not going to have a significant impact on us because our average selling pricing is actually quite high regarding our product.

So, even considering the subsidy is not going to be a very big amount comparing to the selling price of the vehicles. [Foreign language] Thank you.

Ming Lee -- Bank of America Merrill Lynch -- Analyst

[Foreign language]

Operator

Your next question comes from Bin Wang of Credit Suisse. Please ask a question.

Bin Wang -- Credit Suisse -- Analyst

Thank you for taking my question. I got two ones. On the first one about application IPO, because one of the key constraints that NIO seems to be the only one still just in the U.S. And also, some of the media report that it's because of the NIO User Trust.

Can you explain a little bit why NIO User Trust? Could be one of the reason when you come back to IPO. That is the first question. And second thing is about gross margin. Actually, you mentioned one of the reason is because auto finance due to the margin decline.

However, if you have seen, the demand has been very good and short on supply. I'm just curious why we in a very tight supply, we still increase the auto finance due to the falling margin. Theoretically, it should reduce the auto finance line. And also, I told -- some of my friends told me that you actually may remove or reduce the auto finance in the number four quarter.

Can I confirm if this is the case? If it's the case, can I assume the gross margin we have will increase in the number four quarter compared to number three? Because you don't provide auto finance anymore. And the average ASP also will increase because auto finance seems to be one of the reason for ASP decline in the number three quarter compared to second quarter. Thank you.

Steven Feng -- Chief Financial Officer

Bin, this is Steven. Thank you for your question. I would like, with regard to your first question, to comment. First, we're open minded.

We closely monitor the market, and we make the right choice in the best interest of our shareholders. Second, we actually explore the possibilities to get listed in Hong Kong market, and we are indeed doing what business need to evaluate and communicate.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Thank you, Bin, for your question. Yeah, so we will make the decisions to best serve the interest of our investors, and we'll be open-minded to different choices. Regarding the impact of the auto financing on the margin, if you get to know about our business operations, you will know that we will need to take some measures, such as balance of the supply and the product configurations, as well as the user demands. For example, with the 75-kWh battery pack, we announced this battery pack in September.

Many users would like it to wait for this 75-kWh battery pack, but just like I mentioned, we will start the delivery of this battery pack in late November. And even at that time, we will still need some time to ramp up the production of the battery pack to a reasonable level. That is why we will need to take some measures to balance this demand among the users and the product configuration, as well as the battery supply. And we encourage the users to choose the 100-kWh battery pack in that case.

We believe the right approach for this, not to reduce the price of our product or offer discount to our users on the vehicle price. So, that is why we would like to take those measures to balance the demand and supply, but this is not going to be the long-term measures we take. This is only a short-term measure for us to balance the supply and the demand situation. Once the supply gets to a reasonable level in the long run, then we believe the overall gross margin and the vehicle gross margin is going to improve.

[Foreign language]

Bin Wang -- Credit Suisse -- Analyst

Thank you.

Operator

Your next question comes from Edison Yu of Deutsche Bank. Please ask a question.

Edison Yu -- Deutsche Bank -- Analyst

Hi, everyone. Thank you for taking our questions. First question is on the ET7 ADAS capabilities. Could you maybe discuss what kind of features we could expect at launch? And if you can't reveal that right now, would you expect to do any sort of demonstrations on the road in the coming months, similar to what, you know, other competitors have done? And then second question, more longer term, you know, last year at NIO Day, you kind of teased a solid-state battery or a hybrid solid-state battery coming to the vehicles, I believe, at the end of next year.

Is there any update on this? Is this still on track? Any details you could provide there, that'd be great. Thank you

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Actually, I believe a lot of people are working on the demos, so we don't actually want the teams to focus their energy on the demo. We would like to have the teams to be fully dedicated to the mass production of the technology and -- of our new product like ET7. Regarding the ET7 NAD, we will need some time to gradually release those advanced features to the users, and we believe for all those features, of course, it will be based on our in-house full stack technology. Previously, I have also explained that the NAD features will be released to the users based on the subscription like the ADAS service.

So, this innovative business model has offered us some flexibilities in terms of how should we provide and when should we provide all those services and the features to the users. We will need to strike a balance between different factors, including the regulations, safety, and reliability. Then after we strike the perfect balance or find a sweet spot, then we can start to provide those services to the users. I believe, right now, there are hundreds of companies working on those kinds of demos, so we don't want to waste our energy on that.

Regarding the 150-kWh battery pack, we are now working together with the partners, and everything is basically on track. Previously, we mentioned that we will start the delivery of this battery pack in the fourth quarter of next year, and we believe we should be able to meet this schedule.

Edison Yu -- Deutsche Bank -- Analyst

Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you, Edison.

Operator

Your next question comes from Jeff Chung of Citi. Please ask a question.

Jeff Chung -- Citi -- Analyst

Hey. Hi, William, Steven. I got three questions. Number one, what kind of annualized total volume production from the NT2.0 platform should lead to the 25% GP margin according to your guidance? Secondly, second question is, apart from the three brand new products launching in 2022, how likely are we going to launch a facelift version of the existing product, the ES8, ES6, and EC6? So, how likely we're going to launch six new products next year, instead of three brand new products? And finally, is the EV credit -- so could you guide us how many points we sold in the third quarter, and from which we can estimate the ASP and the credit compared with our previous quarters? Thank you, William.

Thank you, Steven.

Steven Feng -- Chief Financial Officer

Jeff, with regard to your first question about GP margin, our 25% GP margin for NP2.0 platform is based on the annual production volume of 300,000 units per year.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Just like Steven mentioned that our plan is, if we can achieve annual production of 300,000 units, we should be able to reach 25% vehicle gross margin on the NIO Technology Platform 2.0. We are very confident to achieve this target. For the existing product, of course, we have a plan to upgrade over product to the NIO Technology Platform 2.0, and we believe that this is very important for the company and we will need to focus -- manage the schedule for the product upgrades in specific details. Internally, we have already kicked off the development to work on this regard, and we have started, how should we upgrade the different products to the NIO Technology Platform 2.0.

Steven Feng -- Chief Financial Officer

Yeah. About the EV credits, totally around 200,000 points were sold in Q3. And what I want to remind is the price volatility for EV credit is also high, along with the China's EV penetration increase recently. So, I hope this can help you to build the expectation for our futures in NIO credit revenue.

Yeah, OK.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] This year, basically, we believe the number of the credits we receive will increase. But this year, the penetration rate of the EV has increased very rapidly. This probably is going to change the situation for next year, regarding the regulatory credit sales. According to my personal estimation, I think considering all those factors, the price of an EV credit is going to be different or probably going to be lower compared with this year's price.

[Foreign language]

Operator

Your next question comes from Paul Gong of UBS. Please ask a question.

Paul Gong -- UBS -- Analyst

Yeah, hi. Thanks guys. I have two questions. The first one is regarding the Norway operation.

And obviously, it has been more than one month, and you just briefly mentioned 92% of the users chose us, and the order has been exceeding your expectation. Can you give us more color, like how the achievement, if it was there, and what challenges were there? Obviously, it's a rich country, but the labor cost might also be much higher than in China, what can you share with us? And after Norway, what is your next destination for the overseas operation? The second question is regarding your expense spending. It seems that this quarter, the increase in SG&A has been a bit faster than expected, while the R&D increase has been a little bit slower than expected. What is the key rationale behind and key reasons behind? Again, you have so many orders and deliveries because of the supply chain disruption, where you can see the slowdown a little bit of the SG&A, and instead to put more budget into the R&D in the following one or two quarters.

[Foreign language]

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Thank you for your question. Regarding our operations in Norway, we believe the basic operations have a mix of expectations in all aspects. After the NIO House opened on September 30, I would like to share with you some data. After the test drive, one-fourth of the users have placed orders for our products.

We believe this is very impressive and this shows that basically, the efficiency is much higher compared with that of here in China. This is on the delivery side. On the services side, so we do need a lot of work to do. Our swap stations in Norway have just started the operation because previously, we need to send people over to work on the installation and on the commissioning of the swap stations.

And then, for the after-sales, we also encountered some challenges brought forward by the COVID situation. But the order momentum is quite strong. We have done some trial delivery at the end of September and in October, and we believe the delivery in November is going to improve significantly. There is a lot of order backlog, but we would like to control our pace of delivery a little bit at the beginning, because internally, we set the target of ourselves, especially on the user satisfaction rate.

We have a kind of VAU, it's vision action upgrade, based on the company. And then, basically, we use the VAU to set the target for ourselves. My personal VAU is to make sure we can achieve high user satisfaction rate. Right now, according to the feedback we got from the ground in Norway, we understand the word-of-mouth reputation has been quite good.

And one of my friend actually sent a video to me to show that there are lot of visitors in the NIO House. I'm very happy to see this video and to see so many people in our NIO House in Norway. We will continue to make a decisive investment on the service and on other aspects, and we will do this step by step. Next year, besides Norway, we're going to enter additional five countries in Europe.

And for this product planning of all those European countries. And basically, the ES8 based on the NIO Technology Platform 1.0 will only be sold in Norway. But the other new Norway -- countries we're going to enter, we will only sell the product that based on the NIO Technology Platform 2.0. [Foreign language] I believe for the investment question, this is more about the long-term competitiveness or the long-term strategy for the company.

In China, the competition is becoming more fierce because there have been many new entrants into the smart EV industry. We believe product development, technology development, sales and service, and network infrastructure, including swapping and charging network, are part of the long-term competitiveness of the company. That is why we double down on our investment in all those regard in 2021. In 2022, we will continue to make decisive investments on those aspects.

We believe the infrastructure like the swapping charging network, the sales and service network are also part of the long-term competitiveness of the company. Maybe in the third quarter of this year, the investment on those aspects have ramped up a little bit faster than expected. That is why we can see the SG&A cost increased higher than the previous expectation. But on the R&D side, we have also doubled our R&D personnel this year, and we have worked on -- we have been working on many new products and the new technologies.

But for other new products and the technologies, it will need some time to ramp up the pace. In the fourth quarter, we will be able to see some R&D expenses and the cost increase in this regard. You can imagine, internally, right now, we have multiple new products and new projects working in parallel. Then, probably at the beginning, when we set up those projects, the cost is not going to be that high, and we will need some time to reflect all those R&D investment on our balance sheet or P&L.

At the beginning, it is relatively small, but gradually, a long way to the project, this cost is going to increase. But we believe that the product and technology should be the cornerstone of the company's long-term competitiveness. And that's why we will continue to make a decisive investment on those regards. [Foreign language]

Paul Gong -- UBS -- Analyst

Thank you very much. [Foreign language]

Operator

Your next question comes from Chang Liu of CICC. Please ask a question.

Chang Liu -- CICC -- Analyst

Thank you for taking my questions. My first question is regarding the capacity expansion. So, could you give us guidance on next year's sales volume, especially for the new three models, and also our current three models? So can our capacity needs meet in next year? And considering the strong EV demand on our new -- more new models in 2023, do we have a plan in constructing more new plants? My second question is regarding the upgrade of smart hardware because we are expecting a really fast upgrade in the smart hardware in next years. So, how do we keep our competitiveness of our next models and to keep our users satisfied? Also, I have a follow-up question for our globalization.

So, in longer term, do we have a guidance for the proportion of overseas sales account for the -- of overall sales? Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language] Thank you, Liu Chang, for your question. Right now, we have basically two plants. The first plant, like I mentioned that we have upgraded the manufacturing lines to further expand the production capacity. For the new plant, we are going to start the production in the third quarter of next year.

So, for our product and operations, we believe these two new plants -- these two plants should be able to support our demand for the short term. If we combine these two plants together, the maximum production capacity we can support is up to 600,000 annual production capacity based on double shifts. So, we believe this maximum production capacity should be able to satisfy our demands in the short term. [Foreign language] For the NIO Technology Platform 1.0 smart hardware upgrade, we previously communicated with our users that we will study some plants to upgrade the hardwares on the NIO Technology Platform 1.0 based on our design.

On the NIO Technology Platform 2.0, we plan to probably provide it as a services starting from next year, and we will provide some more details and updates on this regard at a more suitable time. Of course, this smart hardware upgrades on the NIO Technology platform 1.0 is not going to be the same as -- the same kind of experience of the NIO Technology Platform 2.0. But we believe the digital carpet of the existing product is going to significantly improve. We have already considered all those flexibilities and the possibilities of the hardware and software upgrades in our product design.

For example, just now, I mentioned about the hardware upgrades, and then for the software aspects, we have been continuously upgrading our software. We launched and released our Aspen 3.0 to our users of the existing products and received great reviews and feedback from all those users. And we will continue to upgrade our software and iterate our software to make sure we can provide much better services and experiences to our users. [Foreign language] Regarding the previous Aspen 3.0, we also believe that this provides a solid foundation for our global market entry.

And if we go back to your question about the global market entry and the target for the global markets, NIO has always aspired to build a global brand. If we look at the global market, we can see that China is still the biggest auto market and the biggest premium market. So, China will still be the most important market for us. But regarding our aspiration for the global markets, I cannot provide A very specific target for the global market at this moment.

But I believe for the markets outside of China in the long term, they should account for around 50% of all sales of our product.

Chang Liu -- CICC -- Analyst

Yeah. Thank you, William.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

[Foreign language]

Operator

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Eve Tang -- Investor Relations

Thank you once again for joining us today. If you have further questions, please feel free to contact NIO's investor relations team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line.

Thank you.

Duration: 86 minutes

Call participants:

Eve Tang -- Investor Relations

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Steven Feng -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Stanley Qu -- Senior Vice President of Finance

Nick Lai -- J.P. Morgan -- Analyst

Ming Lee -- Bank of America Merrill Lynch -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Edison Yu -- Deutsche Bank -- Analyst

Jeff Chung -- Citi -- Analyst

Paul Gong -- UBS -- Analyst

Chang Liu -- CICC -- Analyst

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